Microsoft-Yahoo! -- Let the Haggling Begin

SAN FRANCISCO -- A Microsoft(MSFT - Cramer's Take - Stockpickr) merger with Yahoo!(YHOO - Cramer's Take - Stockpickr) will probably go through, analysts agree.

But dealmaking is in the details, and consensus ends there. Some observers suggest Microsoft will sweeten its $31-a-share offer, while others say the bid is already looking too high.

Pessimism among Yahoo! shareholders that the stock can justify a higher price drove down shares Monday. Yahoo! ended the session down 66 cents, or 2.3%, to $27.70. Microsoft was unchanged, at $29.16.

As Microsoft and Yahoo! play out carefully orchestrated merger moves, including Microsoft's threat to mount a hostile proxy fight, factors up for negotiation include Yahoo!'s onerous poison-pill provisions as a post-acquisition cost that Microsoft must factor in.

The provisions are one of the few arrows left in Yahoo!'s quiver as it holds out for more money. One week after Microsoft's Feb. 14 bid for the company, Yahoo!'s board approved changes to its severance plan providing employees let go after a change in control their base pay for up to 24 months.

As with any acquisition integration, Microsoft plans to lay off duplicate staff. Nullifying the provisions would be crucial to a successful merger.

If Microsoft goes hostile, deal closure would not only take longer, Friedman Billings analyst David Hilal said in an interview. Yahoo!'s board could portray the merger as anti-competitive, extending the regulatory review. That delay would likely cost Yahoo! some key executives Microsoft is counting on, he added.

"When I think about total cost for Microsoft, it's going to be best for them to make this a friendly deal and not go hostile," Hilal said. "At the end of the day, that's what happens. Microsoft will raise the bid slightly to make this happen in a somewhat timely manner." The firm makes a market in shares of Microsoft.

While a successful proxy fight putting Microsoft loyalists on Yahoo!'s board would make repeal of the poison pill likely, that's not the best means to the end, according to Hilal.

"If they do agree [to a sale], Yahoo! will repeal those poison pill provisions," Hilal predicted. But convincing Yahoo! to enter a deal means Microsoft must sweeten the bid.

But a higher price doesn't make sense to some observers. It has become difficult for Yahoo! to justify an increase as market conditions have worsened over the past two months, says Allan Krans, analyst with Technology Business Research. It will be tough for Yahoo! to overcome Microsoft's first bid, he added.

Yahoo! has not proven that its internal plans can match the value of Microsoft's offer. "That's the critical point that shareholders are going to look at," he said.

"Externally, Yahoo! is still making a good show of stating their intent to go it alone and execute on cost savings, restructuring and alignment plans," Krans said. "But there's a realization there that they are not going to generate a return to shareholders" comparable to Microsoft's offer, and the combination is the best way to make a successful run against Google(GOOG - Cramer's Take - Stockpickr) and solidifying the No. 2 position."

Alongside deteriorating market conditions since the bid, Yahoo!-specific metrics have also deteriorated, Sanford Bernstein research analysts wrote in a note Monday. "Yahoo's share of U.S. search engine traffic and page views have both declined in recent months, although U.S. unique visitors have increased year over year." Bernstein makes a market in both stocks. Microsoft is a non-investment-banking client of the firm.

Moreover, Yahoo!'s March road show making its case for a higher valuation "cut no ice with investors," Bernstein analysts wrote. Microsoft is unlikely to raise its $31-a-share offer, although it may go lower, they added.